[UPDATE: September 20, 2019]
Private companies who must integrate the new lease accounting rules (ASC 842) by December 15, 2019 are closely watching some recent developments.
First – as recently reported in the Wall Street Journal, public companies that already implemented ASC 842 (by the December 15, 2018 deadline for public companies) significantly underestimated the challenge of doing so. A referenced study by LeaseQuery notes that about two-thirds of companies in the later stages of implementing the standard have experienced difficulties. This compares unfavorably to only 37% of companies (according to a survey of 200 finance professionals at mostly public U.S. companies), who had anticipated the transition would be difficult.
Second - likely in response to reported challenges related to ASC 842 adoption to date, the FASB, which sets U.S. accounting standards, advanced a proposal last month to give private companies an extra year to comply with the leasing standard. This would extend the deadline to December 15, 2020. Companies had until September 16, 2019, to comment on the proposal, so additional modifications to the ASC 842 implementation timeline may be forthcoming.
Atalaya and our portfolio company, Nexseer Capital, will continue to monitor FASB’s implementation timeline during this transition period.
On May 13, the American Institute of Certified Public Accountants (AICPA) requested that the Financial Accounting Standards Board (FASB) suspend the date by which private companies must integrate the new lease accounting rules (ASC 842) by one fiscal year. The new lease accounting standard was introduced in February 2016 and while public companies had to implement the new standard by December 15, 2018, the current deadline for private companies is set for December 15, 2019.
The AICPA appeal followed a similar plea back in early May by the Associated General Contractors of America (AGCA), a trade association which represents 26,000 contracting businesses, to delay the onset of the new lease accounting standards for private businesses by one year. The AICPA represents over 400,000 members and is expected to have meaningful clout with FASB.
By way of background, in response to financial and accounting scandals back in the early 2000s, the SEC tasked the FASB, which creates the standards for U.S. GAAP, with drafting an update to numerous accounting standards, including ASC 840 covering leases. The goal was to create better transparency and eliminate confusion for investors around “off-balance sheet” operating leases. This resulted in the FASB cooperating with the International Accounting Standards Board (IASB), which creates standards for the rest of the world, to finalize ASC 842 and IFRS 16 respectively, by February 2016 with the adoption deadlines as stated above.
With ASC 842, both operating leases and finance leases longer than 12 months must be capitalized on the balance sheet. This will provide more clarity to both investors and lenders trying to properly evaluate a business, but the change will require upfront time and expenses.
Both the AICPA and the AGCA in their letters to the FASB note the immense amount of resources and time necessary to implement all of the new accounting standards, and state that private companies need more time to successfully integrate the new rules into their financial statements. The AICPA wrote, “Many private companies still need to expend significant resources to adopt the new revenue standard.” This sentiment was echoed by the AGCA, which made a similar statement to emphasize the importance of giving private companies additional time to implement the standard.
Additionally, two recent reports on private company preparedness for ASC 842 seem to prove the concerns of the AICPA and the AGCA. Deloitte reported in a recent study that only 30% of companies will adopt ASC 842 by the deadline, 44% are only partially prepared, and the remaining 33% report that they were not ready to comply. Another study done by the Center for Plain English Accounting noted that over 50% of private firms claimed they were not ready to implement all of what the new lease accounting standards entail.
Others have also brought it to the attention of the FASB that even some public companies, with more adequate resources than private companies, were struggling to implement all of the new accounting standards.
There has been some success in lobbying the FASB in the past. Back in 2015, both private and public companies were granted a one-year extension on the new revenue booking rules. However, just last month, the FASB denied a request to change the new loan-losses accounting standard by a group of regional banks.
Atalaya and our portfolio company Nexseer Capital are continuing to monitor the FASB’s implementation timeline, and are flexibly assisting and working with counterparties during this transition period.